Washington Mutual Executive Predicted CollapseWilliam Longbrake served as chief financial officer for the failed savings and loan from 1982 until 2002. Longbrake says he started warning management about a housing bubble in 2003. Now, he says the government needs to act to stop irrational panic from making the situation worse.

Today was the first day of bankruptcy proceedings for Washington Mutual, the largest commercial bank to fail in US history. It collapsed last week, 119 years to the day after it was founded in Seattle. For most of us, these bank failures appear suddenly out of the blue. But many on the inside say they've watched with horror for years as a good bank unravels. As a part of a joint production with Chicago Radio's 'This American Life,' NPR's Adam Davidson spoke with the former chief financial officer of Washington Mutual.

ADAM DAVIDSON: William Longbrake was the CFO until 2002 and a senior executive until he retired just a month ago. He told me that if I called him last week, he wouldn't talk to me or anyone in the press. But now, Washington Mutual is gone. There's no one left to sue him for breaking any non-disclosure agreements. And what became clear quickly is that Longbrake has had a lot he's wanted to say for a long time.

Mr. WILLIAM LONGBRAKE (Former CFO, Washington Mutual): There was something that disturbed me deeply, and it was probably about 2003. And that's when home prices began to rise at a rate that was much faster than people's incomes were rising. Felt good when they were going up. Everyone was giddy with all the wealth that they were accumulating and a lot of them spent it and so forth. But the problem was that, eventually, the ability of a lot of people to buy homes just disappeared.

DAVIDSON: It's now a matter of public record that Washington Mutual, most people call it WaMu, was a central player in the housing bubble. It lent money to a lot of people to buy homes they just couldn't afford. You can find a lot of people now who say they always knew it was a housing bubble. And it might seem self-serving of Bill Longbrake to join that group. But we called around and spoke to some former WaMu board members. None of them would go the record but they all said Bill Longbrake is right. He did warn them a long time ago that the housing market was becoming too risky. WaMu shouldn't be so heavily involved. And management just didn't listen to him. And why would they? At the height of the housing bubble, they were making so much money.

Mr. LONGBRAKE: When you're in good times and things are going up, everybody tends to be incredibly optimistic and straight-line out that optimism into the future forever. And it's very hard to go against the tide, those who were raising the red flags and saying, hey, this is too good to be true. It's building up to a peak that willl have to reverse, and when it does it'll create a lot of damage. Those people just don't get listened to.

DAVIDSON: Most of us learned of WaMu's troubles recently, but Longbrake says it was clear inside the bank in 2006, long before the housing bubble popped, that too many of their mortgage customers were not paying back their loans.

Mr. LONGBRAKE: Well, what Washington Mutual did, and a lot of other banks did this as well, is come back to sensible underwriting standards, and unfortunately, too little, too late because what it actually did is reduce the demand for homes right at the same time that builders were pouring new homes into the marketplace.

DAVIDSON: Longbrake knew WaMu was in trouble a long time ago, but he did not expect this global banking crisis. Although at its core, the crisis is just a repetition of what happened at WaMu. People on the inside like Longbrake might know they have all sorts of dodgy mortgages and mortgage-related securities on their books. But someone outside has no way to know exactly how risky the bank is.

Mr. LONGBRAKE: You don't have on the public information an explicit delineation of what the value of the loans are. You have the types of loans, whether it's residential mortgage loans or commercial real estate loans or credit card loans, you can make your own guesses about what that is, but one bank could have very conservatively underwritten loans of good value, good performance and another bank could have garbage.

DAVIDSON: And that means banks don't want to do business with other banks. They just can't tell the good ones from the ones that are built on garbage. Longbrake is not done giving dire warnings, by the way. He supports the bailout, but says it won't solve the central problem. He says this crisis was set off when inflated home prices started to fall.

Mr. LONGBRAKE: And many expect those prices to drop on average across the nation by maybe another 10, 15, even 20 percent. And so simply getting - taking away the irrational panic isn't going to address that problem. You're still going to have losses that the system has to absorb, and until that's completed, there will continue to be negative pressure on financial institutions and probably negative consequences for the economy as a whole.

DAVIDSON: Right.

Mr. LONGBRAKE: I hope that doesn't sound too dark, but that's...

DAVIDSON: It's pretty dark, Bill. As I mentioned. Bill Longbrake retired a few weeks ago. Yesterday, JPMorgan Chase, which bought what remains of WaMu, fired almost all of the remaining senior executives. Adam Davidson, NPR News.

SIEGEL: There's an extended version of the interview with William Longbrake on our podcast, Planet Money. You can find it at npr.org/money.

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